Loonie’s Influence on Trade to Dwindle as Export Markets Change

The high-flying loonie is often a target when politicians and pundits are looking for sources of pressure on Canada’s export sector, but the Canadian dollar’s influence on trade will dwindle in coming years as Canada ramps up its exports to emerging markets.

That’s the conclusion of a study by the Conference Board of Canada which looked at Canada’s trading relationship with seven key trade partners: the U.S., the U.K., the euro zone, China, Brazil, Mexico and Japan.

The exchange rate is a factor in growth in exports to some emerging markets, the study says. But real gross domestic product growth in those countries will be the main factor driving growth in Canada’s merchandise and service exports to them, it says.

Changes to the make-up of Canada’s exports in recent years have reduced the importance of the Canadian dollar as an influence on trade, the study says.

The rising volumes of Canada’s exports of raw materials — especially oil and natural gas — to emerging markets such as China explains the relatively minor role the exchange rate plays in determining exports to some markets.

The Conference Board says energy and mine products accounted for over 50% of Canadian exports in 2011, up from 30% in the early 2000s.

Because most raw materials are priced in U.S. dollars, they aren’t affected by movements in the Canadian dollar. Rather, it’s Canada’s raw-material exporters that feel the real squeeze from a stronger Canadian dollar.

The exchange rate isn’t even the key factor accounting for fluctuations in Canada’s exports to the U.S. It’s significant, but not as much as real GDP in the U.S., according to the study. Oil and gas have become Canada’s top export to the U.S., and demand for these raw materials is not closely linked to changes in the Canadian dollar, it says.

The supply of mineral fuels to the U.S. is expected to increase as production from the oil sands in Alberta expands.

With the U.S. accounting for over 70% of Canada’s exports, the study says the U.S./Canadian dollar exchange rate will nonetheless remain a significant factor in explaining growth in Canada’s merchandise exports to the U.S.

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Canada Real Time provides insight and analysis into what’s making news in Canada, a country punching above its weight on the world stage thanks to its vast resources and strong banking sector. Drawing on the expertise of The Wall Street Journal and Dow Jones Newswires, we take a look at developments in fields ranging from business to politics to culture. You can contact the editors at canadaeditors@dowjones.com